Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
H u g e d e b t ! S t i l l a c o n c e r n …
RCom with the second highest subscriber base has very low VLR
subscribers resulting in huge diversification in subscribers (16.8%) and
revenue (8.2%) market share. The company is in the process of cutting
down free minutes on the network resulting in lower MoU growth than
peers. Also, huge net debt levels of 5.8x FY11 normalised EBITDA are a
huge concern for RCom. Interest costs would rise, going ahead, as RCom
replaces its FCCB with higher coupon debt. Several attempts to monetise
tower assets have been unsuccessful while the current market scenario
and regulatory overhang would make it all the more difficult to get
desired valuations. The only silver lining is increase in external tenancy on
RCom’s towers backed by RIL’s BWA rollout. We have not factored in any
revenue from external tenancy till a formal announcement is made. We
rate RCom as SELL with a target price of | 84.
Huge debt remains a concern
RCom has a huge debt of about | 33699.5 crore as on September 2011.
The normalised net debt/EBITDA stood at 5.8x in FY11 as compared to
3.0x and 3.1x for Bharti Airtel and Idea Cellular, respectively. Though the
company has refinanced some of its debt through cheaper Chinese debt
with longer maturity, the long term issue still remains. Also, it impacts the
company’s network rollout capex. With capex guidance much lower than
its peers, we believe RCom may lose out on network depth and quality.
Tower deal – A ray oh hope
The company has also been looking at diluting its stake in the tower
business to repay its debt. However, we believe given the market
scenario it would be difficult to get the desired valuations for Reliance
Infratel while the regulatory uncertainty would make equity dilution in the
parent company more difficult. Increase in external tenancy would be a
game changer for RCom. The company has announced it is in talks with
Reliance Industries for renting out towers for the latter’s LTE roll out.
Valuations
At the CMP of | 95, the stock is trading at 26.5x FY12E EPS of | 3.6 and
25.8x FY13E EPS of | 3.7. We have valued the stock using the DCF
methodology and arrived at a target price of | 84/share, assuming 4.8%
CAGR in revenue over FY11-FY20E and terminal growth rate of 3%. We
maintain our SELL rating on the stock.
Company background
Reliance Communications is one of the India’s largest integrated
communications service providers with over 150 million individual,
enterprise and carrier customers.
RCom offers CDMA and GSM based wireless services on a nationwide
basis. Recently, the company started 3G services in all 13 circles where it
had won spectrum. RCom provides a gamut of services in mobile and
fixed wireless voice, data, and value added services for individual
consumers and enterprises. The Global Enterprise Business Unit offers a
whole portfolio of Enterprise, IT infrastructure, National and international
long distance voice, video and data network services on an integrated and
highly scalable platform. The company’s business segments comprise
Carrier, Enterprise and Consumer business units. The company’s DTH
business has moved into its third full year of operations. Reliance Digital
TV is available at more than 100,000 outlets across 8,100 towns in the
country. The retail and distribution reach as well as other elements of
infrastructure established for their wireless network, have been leveraged
to expand their DTH presence.
Valuation
RCom has been struggling with its KPIs with a lesser proportion of active
subscribers in its subscriber base as compared to its peers and declining
traffic growth. To add to its woes, a huge debt remains a concern. This
has caused its capex guidance to be just | 1500 crore, which is way lower
than industry standards. However, if the company is able to strike a tower
deal, it will help address the huge debt concern.
At the CMP of | 95, the stock is trading at 26.5x FY12E EPS of | 3.6 and
25.8x FY13E EPS of | 3.7. We have valued the stock using the DCF
methodology and arrived at a target price of | 84/share, assuming 4.8%
CAGR in revenue over FY11-FY20E and terminal growth rate of 3%. We
maintain our SELL rating on the stock.
Exhibit 109: DCF Assumptions
| in Crore
WACC 11.4%
Revenue CAGR over FY11E-20E 4.8%
Present Value of Cash Flow till FY20E 56,401.6
Terminal Growth 3.0%
Present Value of terminal cash flow 35,596.9
PV of firm 56,401.6
Less: Current Debt 39,071.4
Total present value of the Equity (excluding current cash) 17,330.2
Number of Equity Shares outstanding 206.4
DCF - Target price (|) 84.0
Source: Company, ICICIdirect.com Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
H u g e d e b t ! S t i l l a c o n c e r n …
RCom with the second highest subscriber base has very low VLR
subscribers resulting in huge diversification in subscribers (16.8%) and
revenue (8.2%) market share. The company is in the process of cutting
down free minutes on the network resulting in lower MoU growth than
peers. Also, huge net debt levels of 5.8x FY11 normalised EBITDA are a
huge concern for RCom. Interest costs would rise, going ahead, as RCom
replaces its FCCB with higher coupon debt. Several attempts to monetise
tower assets have been unsuccessful while the current market scenario
and regulatory overhang would make it all the more difficult to get
desired valuations. The only silver lining is increase in external tenancy on
RCom’s towers backed by RIL’s BWA rollout. We have not factored in any
revenue from external tenancy till a formal announcement is made. We
rate RCom as SELL with a target price of | 84.
Huge debt remains a concern
RCom has a huge debt of about | 33699.5 crore as on September 2011.
The normalised net debt/EBITDA stood at 5.8x in FY11 as compared to
3.0x and 3.1x for Bharti Airtel and Idea Cellular, respectively. Though the
company has refinanced some of its debt through cheaper Chinese debt
with longer maturity, the long term issue still remains. Also, it impacts the
company’s network rollout capex. With capex guidance much lower than
its peers, we believe RCom may lose out on network depth and quality.
Tower deal – A ray oh hope
The company has also been looking at diluting its stake in the tower
business to repay its debt. However, we believe given the market
scenario it would be difficult to get the desired valuations for Reliance
Infratel while the regulatory uncertainty would make equity dilution in the
parent company more difficult. Increase in external tenancy would be a
game changer for RCom. The company has announced it is in talks with
Reliance Industries for renting out towers for the latter’s LTE roll out.
Valuations
At the CMP of | 95, the stock is trading at 26.5x FY12E EPS of | 3.6 and
25.8x FY13E EPS of | 3.7. We have valued the stock using the DCF
methodology and arrived at a target price of | 84/share, assuming 4.8%
CAGR in revenue over FY11-FY20E and terminal growth rate of 3%. We
maintain our SELL rating on the stock.
Company background
Reliance Communications is one of the India’s largest integrated
communications service providers with over 150 million individual,
enterprise and carrier customers.
RCom offers CDMA and GSM based wireless services on a nationwide
basis. Recently, the company started 3G services in all 13 circles where it
had won spectrum. RCom provides a gamut of services in mobile and
fixed wireless voice, data, and value added services for individual
consumers and enterprises. The Global Enterprise Business Unit offers a
whole portfolio of Enterprise, IT infrastructure, National and international
long distance voice, video and data network services on an integrated and
highly scalable platform. The company’s business segments comprise
Carrier, Enterprise and Consumer business units. The company’s DTH
business has moved into its third full year of operations. Reliance Digital
TV is available at more than 100,000 outlets across 8,100 towns in the
country. The retail and distribution reach as well as other elements of
infrastructure established for their wireless network, have been leveraged
to expand their DTH presence.
Valuation
RCom has been struggling with its KPIs with a lesser proportion of active
subscribers in its subscriber base as compared to its peers and declining
traffic growth. To add to its woes, a huge debt remains a concern. This
has caused its capex guidance to be just | 1500 crore, which is way lower
than industry standards. However, if the company is able to strike a tower
deal, it will help address the huge debt concern.
At the CMP of | 95, the stock is trading at 26.5x FY12E EPS of | 3.6 and
25.8x FY13E EPS of | 3.7. We have valued the stock using the DCF
methodology and arrived at a target price of | 84/share, assuming 4.8%
CAGR in revenue over FY11-FY20E and terminal growth rate of 3%. We
maintain our SELL rating on the stock.
Exhibit 109: DCF Assumptions
| in Crore
WACC 11.4%
Revenue CAGR over FY11E-20E 4.8%
Present Value of Cash Flow till FY20E 56,401.6
Terminal Growth 3.0%
Present Value of terminal cash flow 35,596.9
PV of firm 56,401.6
Less: Current Debt 39,071.4
Total present value of the Equity (excluding current cash) 17,330.2
Number of Equity Shares outstanding 206.4
DCF - Target price (|) 84.0
Source: Company, ICICIdirect.com Research
No comments:
Post a Comment